Deferred Taxes, Intercompany Sales of Inventory, Partial Equity Method Petra Corporation owns 70% of the common stock of Swain Company. The stock was purchased for $420,000 on January 1, 2000, when Swain Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2004, are presented here: LO5 Petra Swain Corporation Company Cash $ 35,000 $ 100,000 Accounts Receivable (net) 211,000 107,750 Inventory—1/1 150,000 110,000 Investment in Swain Company 456,925 Other Assets 500,000 400,000 Dividends Declared 100,000 10,000 Purchases 850,000 350,000 Other Expenses 180,000 114,000 Income Tax Expense 27,000 28,250 $2,509,925 $1,220,000 Accounts Payable $ 70,000 $ 30,000 Other Liabilities 55,000 35,000 Deferred Tax Liability 20,000 5,000 Common Stock 680,000 500,000 Retained Earnings 555,000 120,000 Sales 1,100,000 530,000 Equity in Subsidiary Income 29,925 $2,509,925 $1,220,000 Inventory—12/31 $140,000 $115,000 The January 1, 2004, inventory of Petra Corporation includes $10,000 of profit recorded by Swain Company on 2003 sales. During 2004, Swain Company made intercompany sales of $100,000 with a markup of 25% on cost. The ending inventory of Petra Corporation includes goods purchased in 2004 from Swain Company for $40,000.
The affiliates file separate tax returns, and the marginal income tax rate for both companies is 40%. Dividends received from Swain Company are subject to an 80% dividends received exclusion.
Required:
A. Prepare a consolidated statements workpaper for the year ended December 31, 2004.
B. Calculate consolidated net income for the year ended December 31, 2004, and consolidated retained earnings on December 31, 2004, using the analytical or taccount approach.